Consumer Behavior in Transitional Economies Part I: Develop Customers

14 Apr 2005|Added Value

There has been much interest in capturing the billions of consumers in emerging markets in recent years. A commonly cited statistic is that there are 4 billion people making less than US$1500 per year worldwide.
The “bottom of the pyramid” appears to offer great potential for market expansion for many companies. In Mexico, there are 45 million earning less than $200/month. Of the over 35 million Latinos in the US, at least 10 million are underserved. Of those that are banked in the US, many have one checking account with less than $500 average balances.
The current thinking takes into account more than just the pure size of the market; many leading experts have pointed out that disposable income among the poor is the same as that of middle income segments.

After many years of helping companies penetrate transitional markets, I am convinced that the opportunities are huge. However, there are some serious differences that must be considered, as well as some common sense myths that must be dispelled.

The most common challenge I have witnessed for companies is to assume that customers in emerging economies have practices for being customers. To be a customer assumes an ability to enter into a transactional exchange where the terms of engagement are clear for both sides of the agents in a transaction. A common mistake for companies is to try to sell their products to the local distribution channels, small mom and pop shops often operated out of someone’s living room, and assume that these entrepreneurs desire to grow their business and accumulate wealth as a matter of fact. On the consumer side, the same mistake is made. Companies assume it to be obvious that a consumer will want to “consolidate debt” or receive discounts for bulk purchases. The assumption is that all human beings behave according to the principle of rational optimization of personal utility. The problem is that this principle assumes that someone lives in a transactional world with transactional practices, as modern customers do. It assumes that people understand what it means to be a modern day customer.

Those living in transitional economies often live in a world of networked loyalties where symbolic capital is the foundation of economic exchange. Symbolic capital, to use a term by the sociologist/anthropologist Pierre Bordeaux, is non-financial and non-skill based capital. Symbolic capital is non-financial and non-skill based capital. It is the kind of capital accumulated through one’s reputation. For those in emerging economies, this often translates into relationship based capital; one cultivates positive local word of mouth through involvement in the local community. For example, one helps others in times of needs or participates in the appropriate festivities or acts as a reference for others. The exact transactional exchange is not always clear in advance. Rather, each party has faith that they will take care of their obligation in some relevant way in a future date. This type of capital relies heavily on word of mouth. If one of the parties is not satisfied, people will know, and the reputation of the corresponding party will be damaged, hence impeding one’s ability to actively participate in the community. The incentive to accumulate one’s symbolic capital, or reputation, is strong enough that each party will check in with each other and assure satisfaction.

The practices between the modern, transactional economy and the loyalty based networked economy are sufficiently different that companies must institute different approaches when doing business in transitional economies. For instance, if a financial service company wants to offer a product such as insurance or loans, asking people to read and sign written contracts alone is insufficient. Written documents that are not followed up with oral conversations are meaningless. People will not underastand the contractural relationship they engaged in and will later blame the financial institution for this failure in communication. In helping a company launch a build-your home service in the lower income Mexican market, we implemented a practice where participants were asked to verbally state their responsibility and the value they would receive in a group setting. In short, if companies truly seek to do business in transitional economies, an approach that involves developing customers to become modern customers is required. Furthermore, the development process must take into account existing loyalty based networked practices.

In summary, companies:
1. Should not assume a modern day transactional economy
2. Take symbolic, relationship based capital seriously
3. Institute processes for developing customers as modern day customers

In my next blog, I will address some common myths regarding consumers in transitional economies, including:
1. Price is the #1 purchase motivator for the poor.
2. If elements in your marketing mix seem too sophisticated, the poor will assume that a product is in accessible.
3. The main reason lower income folks don’t have savings accounts or take on formal credit is because they don’t qualify for formal banking.

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